Tech

Portuguese government vetoes Vivo sale to Telefonica

Bid for Portugal Telecom-owned stake sweetened for third time

By

AudeLagorce

LONDON (MarketWatch) -- The Portuguese government on Wednesday used its "golden share" in Portugal Telecom to block the sale of the company's stake in Brazilian mobile operator Vivo to Spain's Telefonica.

The unexpected move came as Telefonica
TEF, -0.80%
(TEF) looked set to gain control of Vivo Participacoes SA
VIV, +0.99%
having sweetened a third time its bid for the Portugal Telecom-owned interest late Tuesday, this time to 7.15 billion euros, or about $8.8 billion.

Meanwhile, shareholders of Portugal Telecom (PTC)
PT, -4.32%
voted on the deal at a special meeting earlier Wednesday. A spokesman for Telefonica said that roughly 75% of shareholders had voted in favor of a sale and 25% against -- but that before the Portuguese government interceded.

The spokesman added that Telefonica would now use all of its legal resources to fight the decision.

Portugal Telecom's shares had risen early Wednesday before being suspended during the meeting. They fell 5.4% when trading resumed in Lisbon.

"This comes totally out of the blue. It wasn't expected at all that the Portuguese government would exercise its golden share, especially as a final decision on the legality of the golden share is expected next week," said Alexandra Delgado, an analyst at Millennium Investment Banking.

Telefonica and Portugal Telecom jointly own Vivo via investment vehicle Brasilcel. The Spanish giant first moved to acquire the shares in Vivo it doesn't already own last spring.

Power struggle

The European Court of Justice is due to rule on July 8 on the legality of the golden share. An initial opinion issued last year suggested it would be found illegal.

A golden share is a nominal share with special voting rights. In some circumstances it allows its owner, often a government, to overrule all other shareholders.

Throughout the power struggle between Telefonica and Portugal Telecom over Vivo, the Portuguese government had argued that it was crucial to the growth prospects of the country's largest telecom company

Deutsche Bank analysts wrote in a note to clients that the government's decision to exercise its veto, in light of an exceptional meeting with a clear majority, "is a clear interference" and compromises shareholder rights.

They pointed out that the European Union has ruled before on the golden-share issue, deciding in 2006 that the Dutch government's share in TNT was illegal and "incompatible with the free movement of capital markets."

Other potential moves

Although unexpected, the government's intervention doesn't mean Telefonica has no options.

"This isn't even that negative for Telefonica. They now know that an offer of this level has the backing of the top shareholders and can go through. The only effect of the veto is that it's postponing everything for a while," said Delgado.

"But the days of the golden share are counted," she added.

If the European Court of Justice rules the golden share to be illegal, Telefonica could come back with its Vivo offer -- or even a bid for Portugal Telecom.

Elia San Miguel, Brazil-based analyst with research firm Gartner, said Telefonica isn't likely to give up.

"Telefonica's pursuit of Vivo is not a new story. They had had their eye on it for several years. They will still pursue it if there is a window of opportunity in the future," she said.

As for Portugal Telecom, it will look for a replacement, most likely in Brazil -- which could take the form of a stake in Oi, recently formed as a result of the acquisition of Brasil Telecom -- though San Miguel said she doubts the Brazilian government would allow Portugal Telecom to build a majority stake.

Full ownership of Vivo would bolster Telefonica's position in the fast-growing Brazilian market at a time when its domestic operations are struggling. By combining Vivo with its Brazilian fixed-line business, Telefonica would be in a stronger position to compete with America Movil
AMX, -0.74%
the operator controlled by Mexican billionaire Carlos Slim.

But Vivo is also essential to Portugal Telecom's future, which is why it rejected a first offer and decided to call a shareholder meeting after the second bid.

Telefonica's initial offer, in May, was for €5.7 billion. It was increased in early June to €6.5 billion.

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